A broker at IG Index. Sterling has tumbled from $1.63 to $1.51 since December. Photograph: Andrew Winning/Reuters

Sterling fell to a two-year low on Monday as currency markets signalled their waning confidence in the UK economy's ability to exit the longest depression in 80 years.

The pound, which has tumbled by 8% in recent weeks, fell to $1.51 as investors digested the loss of Britain's AAA credit status and the increasingly gloomy economic outlook from independent forecasters. As recently as December it was trading at $1.63.

The ratings agency Moody's, which downgraded the UK to the lower AA1, joined many analysts in predicting that the economy will be held back by a longer than expected period of low growth and bigger debt mountain.

Stock markets remained calm and gilt yields, which show the government's borrowing costs, at 2.1% remained higher than Germany's 1.6%, but lower than France's 2.2%.

George Osborne, deflecting criticism of his previous desire to maintain the UK's AAA status, said it was more important that gilt yields remain low, allowing the government to borrow cheaply to fund its debts.

The FTSE 100 climbed on the news, largely on the back of rising commodity prices, which have increased in reaction to the improving situation in Asia and the US, and the expectation of a fresh round of quantitative easing by the Bank of England to boost growth.

While some commentators welcomed the fall in sterling, arguing it would help manufacturers break into new markets with lower priced exports, there was a degree of nervousness that markets were close to losing confidence in the chancellor's economic strategy.

In contrast to the eurozone, which has recovered some of its poise since the European Central Bank promised to do "whatever it takes" to save the currency, the pound has appeared vulnerable to attack.

Jonathan Loynes, chief European economist at Capital Economics, said: "While the downgrade may add to market nervousness about the UK's fiscal position, the key effect is simply to re-emphasise the weakness of the economic outlook."

Loynes said he forecast just 0.2% GDP growth this year, which is well below the consensus of 0.7 to 0.8%, though he said the ability of the Bank of England to print money would cap the UK's borrowing costs by keeping gilt yields low.

However, the pound could still have some way to fall. Figures released by the US Commodity Futures Trading Commission showed that betting against the pound was the most popular currency trade last week.

High street bets on the pound have also gained in popularity, with Ladbrokes offering odds of 4/1 that sterling will sink to the same value as the US dollar this year. Shorter odds of 6/4 are available to punters who believe the pound will fall to parity with the euro in the same time frame.

Business leaders have lobbied the chancellor to adopt a wide ranging strategy to boost the weak economy.

John Longworth, director general of the British Chambers of Commerce, said he was concerned at the lack of lending to small businesses by high street banks. In response, he said George Osborne must accelerate plans to create an investment bank and allow it to lend directly to business customers.

The bank, which is expected to increase the funds available for commercial loans, is still largely under wraps and so far earmarked only to lend to other commercial banks.

"There has been a lack of delivery," he said. "The government needs to be more ambitious."